The relationship between the macroeconomic variables and term structure of interest rates: evidence from China
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| Title | The relationship between the macroeconomic variables and term structure of interest rates: evidence from China
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| Author | Chen Langnan and Zheng Hengliang |
| Organization | Lingnan College, Sun Yat-sen University |
| Email | nscln@mail.sysu.edu.cn；hengliang27@163.com |
| Key Words | Term Structure of Interest Rates; Macroeconomic Variables; Factor Model; Multivariable Error Correction Model |
| Abstract | This study examines the properties of term structure of interest rates and the relationship between the macroeconomic variables and the term structure of interest rates. First, this study utilizes the factor model to analyze the yield curve and extract the level factor and the slope factor. Second, this study employs the stepwise regression and overall screen methods to analyze the macroeconomic variables and select the macroeconomic variables that have the significant impacts on the terms structure of interest rates. Finally, this study uses multivariable error correction model to examine the relationship between the macroeconomic variables and the term structure of interest rates. The empirical results show that the level factor and slope factor contribute 78% and 14% to the change of the yield curve respectively. The expected economic growth, the interest rate of money market and the incremental credit are the significant explainable factors on the level factor while the interest rate of money market and the US dollar index are the significant explainable variables on the slope factor. Particularly in the short run, the variables related to the expected economic growth have the significant impacts on the level factor while the variables related to inflation have not impacts on the level factor. The interest rate of money market is important for both level and slope factors. |
| Serial Number | WP748 |
| Time | 2014-11-04 |
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